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Stock Spotlight: Beer Stocks on Tap

It might not be for the right reasons, but beer is synonymous with the college lifestyle.

Excessive beer drinking is nothing to be proud of and many bad things, including death, can quickly stem from doing 12-ounce curls. Yet, nobody is expecting a return to prohibition any century soon.

So, now that you have read my warning label lecture on drinking responsibly, is it a wise idea for you to plop some money down next to the beer cooler and invest in the stocks of the world’s top brewers? Let’s raise a glass and see…

Anheuser-Busch (BUD)

Snapshot: When you say BUD…you say suds, theme parks such as Sea World and Busch Gardens and the world’s largest brewer of beer.

Recent Price: $46.97

Pros:

At press time, Anheuser-Busch was on the cusp of many distribution and acquisition deals with brewers worldwide, including Rolling Rock and InBev. A company that’s been around for 154 years needs to find innovative ways to grow its revenue stream. This is a good start.

Stock recently bounced off five-year lows of $40 a share and rallied nicely off that level of support. From a technical standpoint, that’s almost as good as a 2-for-1 happy hour party.

BUD just inked a deal that guarantees it will be the exclusive beer advertiser during the mother of all television programs — the Super Bowl — through 2012.

Cons:

It’s great to be in the Super Bowl with your ads, but those spots are priced higher than fine wine at $2 million per 30 seconds. Let’s face it, that’s a lot to fork over for a bunch of Clydesdales that can kick around a football.

Americans have caught on that beer drinking is not what the movie "Animal House" cracked it up to be. So, Anheuser Busch and its brewsky brethren have started to focus on creating beers based on what makes wine more appealing – healthier, less calories, better tasting. The problem is that when Americans fall in love with wine, beer becomes an afterthought.

In a cutthroat market for beer sales, BUD has taken the lead in slashing beer prices, which is great for consumers and market share, but not-so-great news for investors.

SABMiller Plc (RHI)

Snapshot: South African Breweries purchased Miller Brewing Company in 2002, and formed the second-largest brewer in the world, with volume of more than 130 million barrels, operations in 40 countries and hundreds of brands.

Recent Price: $31.84

Pros:

Like its competition, SABMiller traditionally does better during hard times. With the economy slowing, people will tend to fall back on their vices and drown their sorrows. Not the wisest of things to do from a health and social perspective, but a windfall for brewers all the same.

Miller’s "Men of the Square Table" advertising campaign should be a "Man Law" for any Marketing and Advertising 101 class to review. Popular ads such as this can become great pop culture and typically lead to higher sales and a better bottom line.

The company made $454 million dollars in the last fiscal year. That’s a lot of trips to the keg, folks.

Cons:

Miller had a bad hangover with its fiscal 2006 earnings report. Revenues were virtually flat year-over-year, and earnings fell down the beer barrel by 7 percent. Sales were hurt significantly by BUD’s price cuts.

Miller’s parent corporation SABMiller is based in South Africa, which is not a bad thing onto itself. However, that means its shares are traded in the U.S. as ADRs, which typically means reduced liquidity for investors. As a result, it may mean more volatility for the share price, low volume and difficulty in finding information about the stock.

The devalued American dollar squeezes SABMiller when it converts its U.S. greenback revenues back to the South African Rand. Four years ago, the conversion was 12 Rand for every dollar. Today, with the rally in the Rand, it means only 7 Rand for every dollar realized and converted. That said, Molson Coors faces the same problem with its conversion from U.S. to Canadian dollars.

Molson Coors Brewing Co. (TAP)

Snapshot: Molson of Canada recently joined forces with Coors of Golden, Colo. The merger created the fifth largest brewer by volume in the world.

Recent Price: $67.63

Pros:

In some ways, the company pays a nice dividend of $1.28 a share, but that only translates to a yield of 1.9%. If the share price stays flat or drops, you would frankly be better off in a one-year certificate of deposit that pays 5 percent.

Mergers create exciting synergies that look marvelous when the consultant presents it on paper. Of course, there is still that little problem called execution. Molson Coors shares have dropped 14 percent off their highs, which means if the merger is executed well, there is room for them to run higher.

If the stars are right and the analysts prove correct, Molson Coors is poised to grow 16 percent in the next year — far out-pacing the industry’s projected 9 percent growth rate and the S&P 500’s forecast for 10 percent growth.

Cons:

Domestic beer sales have dropped 22% since 2000, according to Beer Marketer’s Insights, an industry newsletter. The beer industry is facing some headaches right now in the way of pricing, transportation costs, labor costs and a downdraft of demand.

Company posted a net loss in the first quarter of $32 million dollars. Someone better call a cab because the CEO needs a ride home! Good thing is that profits are expected as the year progresses.

Planned sale of its Milwaukee brewery fell flat when a deal could not be reached between the prospective buyer and the local union. As long as they can unload the unit to someone else, Molson Coors will be fine. However, if the sale goes stale, it could mean the stock is "tapped" out.

Michael Abramowitz is a freelance writer based in Florida. To avoid a conflict of interest, he does not currently own any of the stocks mentioned above.